How Retirees Can Withstand a Tough Market Winter as Inflation Stays High

What You Need to Know

Like most other investors, U.S. retirees are going through a very challenging period in the markets.
Unlike other investors, retirees having to sell equities to meet income needs are locking in substantial losses.
There are some silver linings in the current environment, however, including opportunities to buy the dip and source higher yielding bonds.

The U.S. Bureau of Labor Statistics published its latest inflation data early Thursday morning, showing inflation ran at 8.2% over the past 12 months before a seasonal adjustment.

According to the BLS data, monthly inflation was 0.4% from August to September on a seasonally adjusted basis, coming in higher than many analysts predicted. In response, U.S. equity markets sold off dramatically in early trading on Thursday, though they did bounce back later in the day.

The disappointing inflation data and subsequent stock price swings have added yet more uncertainty to what has already been a terrible year for the typical retirement investor, sources say. Moving forward, it will be critical for advisors to help their clients avoid emotional decisions triggered by worrying market headlines.

Advisors can also help their clients identify opportunities for strategic reinvestment and to prepare for an eventual rebound in the price of stocks and bonds.

A Fresh Wave of Rate Worries  

In written comments shared with ThinkAdvisor after publication of the BLS data, Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, says the inflation figures only increase worries about the prospect of continued — and sizable — interest rate hikes through at least the end of the year.

“The realization that the Federal Reserve is in it for the long haul when it comes to setting and maintaining higher interest rates has sent a fresh wave of worry through financial markets,” Streeter writes, pointing out that the Fed, like many other central banks, is finding that inflation is proving to be a tough opponent to beat down.

“Producer prices, the cost of producing goods and services, jumped again in September by 0.4%, more sharply than expected, and this will feed through to what consumers will have to pay,” Streeter points out. “The U.S. consumer price snapshot will be closely watched by investors, but the direction of travel for rates is clear. For now the only way is up.”

To that end, the BLS data shows inflation on items excluding food and energy increased 6.6% for the 12 months ended in September, a slightly higher increase than the 6.3% logged for the year ending in August. The energy index rose 19.8% in the same time period, a sizable but smaller increase than the 23.8% rise for the year ended in August. The food index gained 11.2% for the year ended in September, compared with 11.4% for the year ended in August.

Keeping the Pain in Perspective

In an interview with ThinkAdvisor given a few days ahead of Thursday’s BLS inflation report, Marcy Keckler, senior vice president of financial advice strategy and marketing at Ameriprise Financial, spoke to the importance of preparing in advance for difficult periods such as this.

“It is important for advisors to realize that our clients are seeing market conditions that we haven’t seen in more than a decade, since the worst days of the Great Recession,” Keckler says. “Yes, we did go through a short-lived crash at the beginning of COVID, but things stabilized quickly. This is a different moment.”

Keckler says this moment shows just how critical it is for advisors and their near-retiree clients to embrace what is commonly referred to as a bucket strategy. Critically, such a strategy must be put in place early and be maintained with discipline even when markets are soaring, Keckler says. Implementing such a strategy during the depths of a market swoon won’t cut it.

“Ideally, clients will have already set aside substantial resources to cover their living expenses without having to sell equity holdings at a dramatic loss,” she explains. “They can spend from the liquid bucket at a moment like this without having to sell mid-term or long-term investments at a significant loss.”

Keckler says she counsels clients, during the core of their working years, to set aside at least six months of living expenses that can be used in case of an emergency, such as a job loss or health crisis that keeps the person from working. When people begin to approach and actively plan for retirement, assuming they have adequate resources to do so, Keckler recommends they carry up to 36 months of liquid living expenses.